Hiba Mouallem:
Hello, and welcome to a new weekly podcast by BNP Paribas Wealth Management. I'm Hiba Mouallem, and I'm joined today by our Global Chief Investment Officer, Edmund Shing, to discuss together infrastructure. Hello, Edmund.
Edmund Shing:
Hello Hiba.
Hiba Mouallem:
So, Edmund, we have lately seen growing interest from investors in the infrastructure sector and this asset class. Can you tell us a little bit more about the sector and the main drivers of the surge?
Edmund Shing:
Yes, I think infrastructure is a very interesting asset class for our investors, for our clients. Why? Well, first of all, because it deals with essential services. So, these are services around energy, around water and waste, around transport, around digital infrastructure, that are all pretty essential to our daily personal and professional lives. So, the demand is very constant. The yields and the returns are very constant as well. But the beauty of infrastructure is that these are real assets, based, of course, on real physical assets that can have inflation-proof pricing over time. So, in other words, the prices of, for instance, toll roads, when you think about motorways or of airports, as an example, tend to go up over time, at least in line with inflation.
And on top of that, there is a link, not a huge link, but a link to economic growth. So, again, if you think about transport, the volume of transport, both motor transport and, of course, clearly air traffic, tends to go up over time in line with GDP growth. So, you have not only an indexation to inflation, but you do have an element of growth built into infrastructure, fairly solid, dependable growth over time. Nothing spectacular. But this is what, perhaps, makes infrastructure attractive as an asset for a client who's looking for something not too spicy, something that is a good diversifier, but gives some level of inflation protection over time. I would say infrastructure, in this sense, is quite similar to real estate, for instance, and perhaps can be compared, but favourably compared, to bonds. Bonds, in contrast to infrastructure, generally don't have any inflation hedge, because it's called fixed income for a reason. The coupon doesn't go up over time. Of course, you would expect the income and the yield of infrastructure to go up in time, at least in line with inflation. So, you know, there are some aspects as to why we think it's a very interesting asset class for investors to consider today.
Hiba Mouallem:
To follow up on what you are saying, we have seen that this interest is also growing due to the current megatrend of digitalisation and electrification. How are those new technologies breakthrough driving the investment's needs in infrastructure?
Edmund Shing:
Well, OK, so obviously, there's a huge amount of investment and interest around AI, everything around artificial intelligence at the moment. Now, of course, in order to support the growth and penetration of AI, we're seeing a massive investment, particularly in data centres. Well obviously, there is digital infrastructure linked to data centres, so that's obvious. On one obvious route, you can actually buy exposure to the data centres themselves. Or you can also buy exposure to the energy needs, because one thing about data centres, particularly AI-related data centres, is that they have enormous consumption of energy of electricity. This electricity needs to be 24/7, so it needs to be constant, needs to be reliable, and again, therefore necessitates investment in the underlying electricity infrastructure, both the generation, whether by nuclear, gas or other, and also the transmission to get it from the power station to the data centre. And so, of course, there is this huge investment around AI going on, both in the digital infrastructure, therefore, and in the energy infrastructure to support that.
Hiba Mouallem:
On another hand, we're seeing a growing interest of governments in this asset class. Can we consider that this is a key motor for infrastructure growth in Europe?
Edmund Shing:
In Europe, absolutely, because we do have government stimulus plans put in place, particularly by the German government, specifically targeted at infrastructure. And I think Germany is a good case in point, because in the old days, you would have said that German infrastructure, particularly transport infrastructure, was very good. Or, if I listen to people in Germany today, I hear nothing but complaints about, for instance, the train network. They said they used to be like Swiss trains, and now they have a service like British trains. So they obviously are in need of infrastructure upgrade. And that's why the German coalition government under Friedrich Merz has put in place a multi-year infrastructure spending plan to renew the infrastructure, both transport, energy and other, because these are some serious economic challenges for Germany. Now, of course, I'm talking about Germany, but this has a wider economic impact in Europe, particularly when you include the extra spending being done in other areas by European governments, such as around defence, which also has some element of infrastructure related to that. And, of course, the installation of data centres we've already mentioned, digital infrastructure. This is not purely the US story. It also is occurring in Europe to some degree as well. So there are also exactly the same drivers from digital infrastructure in Europe. So when I take all of these elements together, yes, I do think that infrastructure demand is clearly growing. There is the money, there are the spending plans in place, and that should definitely, I think, underline good growth within European infrastructure for years to come.
Hiba Mouallem:
You mentioned in the introduction the stability of this asset class. How can infrastructure be a protection in those times of uncertainties compared to other asset classes?
Edmund Shing:
Well, again, there is some economic sensitivity, for instance, of transport infrastructure to the underlying economy, but it's not that great. Even in times when growth is weak, you still have an awful lot of motorway traffic, trains still run, people still go on holiday to some degree, maybe a little bit less, but they still go. So again, airports, toll roads still get a lot of traffic. Again, if you then go down to things like water and waste, well that's really rather insensitive to the economy because really we still have to shower, we still have to drink, we still have to irrigate crops, no matter the state of the economy. And the same goes for the waste.
So while there is some economic sensitivity within infrastructure, it's not that great. It's pretty stable overall. And even when there is a recession, it tends to suffer less than asset classes, equivalent asset classes such as real estate, which have a much greater, I think, direct economic exposure and tend to take a bigger hit. So in a sense, the performance in the good times of infrastructure is very good. But most importantly, even in the tougher times, it is a pretty resilient asset class and diversifies well when compared to real estate, bonds or equities.
Hiba Mouallem:
So finally, Edmund, do you think that investing in infrastructure is a good bet currently? And if so, where should investors look to?
Edmund Shing:
Well, I think as part of a diversified portfolio, particularly if you're considering a long-term investment portfolio, then absolutely infrastructure has its place. I think there are two ways to look at this, depending on the size of the portfolio. For smaller portfolios, I would say that you would start with listed infrastructure. And these are funds and exchange-traded funds that invest in public listed companies in the infrastructure space. So for instance, listed toll road operators, listed airport companies, listed water companies. You can buy funds and ETFs that take a broad portfolio of these companies. For bigger portfolios, you might want to consider investment in private, unlisted infrastructure funds, because over the long term, let's say over the last 10 years, we can note that although listed infrastructure funds have performed well, private infrastructure funds have performed even better because they have a wider access, a wider selection of infrastructure assets to invest in, in the private markets, as opposed to in the public listed markets. So that actually has been a very good source of returns as I said, over the last decade for people with bigger portfolios and who can take on board the illiquidity that is inherent in private infrastructure funds.
Hiba Mouallem:
Very interesting. Thank you so much, Edmund, for all the information. And thank you to our audience for listening to this podcast. Please like, share and subscribe to our series of podcasts. Goodbye.